Japan’s FSA Examines Reinsurance Arrangements
The Japanese Financial Services Agency (FSA) is conducting a review of life insurers’ increasing use of reinsurance, according to reports. The agency’s focus is on transactions involving firms backed by international investment companies and the potential risks associated with these deals.
Sources familiar with the matter have indicated to Bloomberg that the FSA is gathering data on the scope of these transactions and the specifics of the contracts insurers have entered into.
Additionally, the FSA is reportedly assessing the extent of exposure to reinsurers based in Bermuda, a prominent center for the global reinsurance industry. Considering the scale of the Japanese life insurance market, which held nearly ¥900 trillion (US$6 trillion) in individual life and annuity policies as of March 2024, this scrutiny is significant.
Offshore reinsurance solutions have become more common among Japanese insurers as they seek to improve capital efficiency and address risks related to an aging population and a saturated domestic market. A report from the Society of Actuaries (SOA) estimates that approximately 30% of Japan’s US$3 trillion liability pool, or US$900 billion, could be reinsured. Projections suggest that between US$150 billion and US$300 billion might enter the market in the next five years, contingent on market conditions and insurers’ capital strategies.
Bermuda’s Role in Reinsurance
Bermuda has established itself as a major offshore reinsurance hub due to its favorable regulatory environment and strong financial infrastructure. As of the end of 2021, Bermuda held the position of the largest offshore reinsurance destination for U.S. life insurers, with a substantial portion of asset-intensive reinsurance business ceded to entities located there.
Reinsurers linked to U.S.-based investment firms, including KKR & Co. and Apollo Global Management Inc., have taken on billions of dollars in liabilities from Japanese life insurers. The assets backing these liabilities are largely invested in private credit, which tends to offer higher returns but often comes with lower liquidity.
These reinsurance structures also allow life insurers to reduce their balance sheet pressures in anticipation of new capital requirements, scheduled to take effect in Japan starting April 1.
